Happy new year! I hope you had a great holiday season.
As we mentioned in our most recent blog “Key Takeaways from 2016”, last year was quite a year… on many fronts. Undoubtedly, there were a few low probability events which were expected to cause the markets to decline substantially should they occur, and we now know the opposite happened. (I am talking primarily here about the Brexit vote in June and our Presidential elections here in the US in November). Everyone’s crystal ball broke last year (and this is where I remind you that no one actually has a working crystal ball…unfortunately). The biggest takeaway for me last year was that unexpected events can occur, and even spook the markets in the short-term, but outside and stronger forces can come in quickly and push them right back up.
So that brings me to this year…2017…and what we expect. LPL Research recently put out their 2017 outlook, and here, high-level, is the summary :
For the economy : based on low probability of a recession this year (according to leading economic data), we expect the economic recovery that began in 2009 may pass its 8th birthday. However, the risk of a recession due to a policy mistake (ie. monetary, fiscal, trade, immigration) has increased heading into 2017.
For the International stock markets : although fundamentals and valuations have been improving in both developed and emerging market equities, there are potential global geopolitical risks to be cautious about.
For the US stock market : we expect S&P500 gains to be in the mid-single-digit returns, driven by (1) a pickup in US economic growth, (2) mid to high-single digit earnings gains as corporate America emerges from its year-long earnings recession, (3) an expansion in bank lending; and (4) a stable price-to-earnings ratio (PE) of 18-19. Gains will likely come with increased volatility as the economic cycle ages.
For the US bond market : we expect an uptick in inflation due to President Elect Trump’s infrastructure spending plans, anticipated fiscal stimulus, and potential Fed rate hikes to possibly put pressure on bond prices in 2017. Ultimately, we expect low-to-mid single digit returns for the Barclays Aggregate Bond Index.
In conclusion, the current economic expansion which this year will be in its 8th year is the 4th longest since 1900, so it’s important to remember that this is an aged expansion. There are many reasons to maintain positivity in 2017, but also reasons to be cautious.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. All indicies are unmanaged and may not be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
Investing involves risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Barclays Capital Aggregate Bond Index, which used to be called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States.